July 4, 2012

 

Dairy prices on decline despite hopes for market revival

While there are expectations for a possible cessation of market weakness due to lacklustre production growth, world dairy prices fall to almost its lowest in nearly three years.

 

Average dairy prices fell 5.9% at the latest globalDairyTrade auction back to some 5% from a low seven weeks ago, when they reached their weakest since August 2009.

 

The decline was led by values of milk fat, which tumbled 10.4% to a 27-month low, while skim milk powder prices fell 9.8%.

 

Whole milk powder, which forms the bulk of volumes on offer, fell too, by 4.1%, with buttermilk powder and cheddar cheese standing firmest, showing value declines of 0.7%.

 

The results follow an uptick by globalDairyTrade, which is run by New Zealand dairy giant Fonterra, to the volumes of product on offer, with 19,000 tonnes of whole milk powder up for sale, 1,500 tonnes more than initially expected.

 

Anhydrous milk fat volumes up for sale were, at 5,630 tonnes, some 2% higher than forecast, with the 9,000 tonnes of skim milk powder on offer some 6% above initial expectations.

 

Fonterra has raised volumes of its dairy products sold through the auction, following a bumper 2011-12 season for New Zealand milk output.

 

Indeed, the enhanced volumes appeared to have "largely resolved... a temporary stock accumulation in New Zealand", the top milk exporting country, Rabobank said.

 

This was one reason for hope in prices, along with the building of stocks to a level "less than many had feared" in the EU and the US too.

 

Furthermore, growth in production is "expected to lose momentum" through the rest of the year, as farmers see further reduction in milk prices and "as weather normalises", meaning no repeat of the enhanced volumes of 2011-12.

 

"The market looks most likely headed for stable pricing through the third quarter, yielding to a slow squeeze in the fourth quarter, with the price recovery gaining levels in early 2013," Rabobank said.

 

"Assuming the continued loss of supply momentum, and even a small demand improvement, the market will significantly tighten in early 2013."

 

However, the bank cautioned over near-term price prospects, saying that the market "rebalancing is likely to occur only gradually".

 

At National Australia Bank, agribusiness economist Michael Creed said that "we see very little upside over the near term".

 

Elevated output, "which has seen around double-digit production growth in New Zealand, year-to-date growth of 4.3% in Australia as well as solid efforts from Argentina, the EU and the US, implies a global market that is extremely well supplied.

 

"Given that the surplus will take time to absorb, we are in for a period of subdued dairy prices," Creed said.